Alternative Investment Management Association Representing the global hedge fund industry
The Alternative Investment Fund Managers Directive (AIFMD), the most significant piece of regulation to be introduced to the alternatives industry, has been met by the European financial community with a degree of confusion and concern. This article will explore the regulation’s implications, how managers should be dealing with it, and the potential benefits it may bring in the future.
On 22 July 2013, the deadline for the transposition of the AIFMD into law in each EEA member state came to pass. While the regulation has faced opposition from its conception through to implementation, on the whole managers have now reconciled themselves to the fact that the AIFMD is here to stay.
Despite delayed adoption and grandfathering periods for implementation in a number of countries, some alternatives investment fund managers (AIFMs) are seeking early authorisation under AIFMD. There are a number of reasons why they are choosing to do this. First, it demonstrates compliance with industry best practice and reassures investors of their ability to meet these new requirements. There are also immediate practical benefits associated with early adoption, such as gaining a Europe-wide marketing passport for their funds. This is particularly important for countries in which un-regulated private placement is likely to be restricted.
Of course, the AIFMD also presents many burdens as well. Under its terms, AIFMs will face a number of new administrative challenges which will create a time burden, limit their flexibility and divert their attention away from their core business of generating returns for investors. One of the stipulations of AIFMD is that AIFMs now need to submit quarterly reports to regulators on each of their funds. As part of this transparency reporting, AIFMs are required to collect over 130 pieces of data from every one of their funds, as well as provide qualitative information to the regulator. This could mean that larger AIFMs will be required to capture thousands of points of data from multiple funds and from many different sources.
In order to minimise disruption to core business functions, it is important that workflows are managed around these new reporting requirements. Outsourcers will have an important role to play in supporting fund managersin this respect. In fact, recent research from KNEIP indicates that 77 percent of AIFMs across Europe are either considering, or have already, outsourced their AIFMD reporting function.
At present, there is no provision in the directive regarding how AIFMs should report their data to investors. Managers have two viable options: using the regular client prospectus or embracing a KIID-style document. While it is early days, and it may require some additional work at first, there are a number of advantages to using the latter approach.
The KIID has been tried and tested under UCITS and has already been well accepted by the investor community. Secondly, it would be easy to fit into an automated process. Finally, such a document also allows for greater flexibility and is simple to update in the event of changes to the underlying fund.
Ultimately, however AIFMs decide to approach this new regulation, they need to demonstrate to investors that they will not be distracted from the business of generating returns. It is also critical that the process of reporting be resourced correctly to ensure there are no unnecessary delays as a result of unforeseen challenges. The experience of the KIID under UCITS has taught us that, more often than not, managers underestimated the time and cost requirements of producing and disseminating this new document. AIFMs should be wary of falling into such a trap because AIFMD, and managers ability to cope with its stipulations, sets a precedent in the industry. If managers are able to effectively deal with the regulation, it will help to reassure investors that fund performance will not be affected by any future administrative and legal challenges either.
Finally, while the resources required to meet the AIFMD reporting obligations may have a constraining effect on managers, there are some potentially positive outcomes that may come out of the regulation as well. The regulatory framework has the potential to achieve a brand status in its own right, in much the same way that UCITS funds have become recognised worldwide as an efficient and flexible investment wrapper that offers investors a degree of confidence.
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